Traditionally, sustainability in business refers to a company’s strategy to reduce the negative impact of its operations on the environment. I have always felt that true sustainability goes much further.
Sustainability is about making sure, to the best of your ability, that your business is well prepared for the future – whatever that future may look like. Being sustainable means that your staff are well cared for, leading to a lower staff turnover. It means that you have a relationship with your customers and can attract new ones. It also means that you embrace and generate change, anticipating rather than reacting. Without money, none of this is possible, so it also means safeguarding your income and profit margins. These things are easier said than done; how can business owners fulfil their responsibility of protecting the environment, community, and staff, as well as protecting the bottom line? And how can we possibly measure it?
Assessing the Demand
The recent rise in the cost of living has impacted our wallets, and this has had an impact on consumer spending. Although we have not experienced a recession, many people are worried and preparing for it ‘just in case’. It would be tempting to think that this will have quelled people’s demand for ethical products.
The Ethical Consumer Markets Report has been published since 1999 and is an important barometer of UK consumer spending. Data is tracked across a wide range of sectors. The most recent report is from 2022 and highlights just how important it is for businesses to be perceived as green. As a global trend, the willingness to spend more on ethical products is starting to decline, mostly in poorer countries. However, in richer countries, including the UK and Ireland, demand is holding steady and, in some instances, increasing. The report shows that hybrid and electric car sales increased by 61% from 2020-21, and the growth doesn’t seem to have been impacted much by the UK government's withdrawal of the electric car grants.
There has been a 32% increase in homes being powered by renewable energy providers – which equates to 1 million more homes. The report, and others like it, have found that the ‘ethical market growth is a long-term trend’. These trends suggest that it might be worth willingly embracing sustainability (ESG) before we are forced to by government legislation. It seems that consumer demand is willing and able to absorb some additional costs and is eager to engage with sustainable businesses. So, provided that adopting these practices doesn’t drive up your costs too much, committing early means you might just find yourself ahead of the competition with other businesses scrambling to catch up.
Environmental, Social and Governance (ESG)
ESG is a framework used to gauge an organisation’s business practices and performances on various sustainability and ethical issues. The main regulations are set out in the Companies Act, and section 172 requires company directors to have regard to the interests of their employees, the need to foster business relationships, and the impact that the business has on the community, environment, and its reputation.
Although this is superseded by the duty that directors promote the success of the business for the benefit of the shareholders, consumers have made it clear that they may reconsider purchasing from businesses failing to adopt ESG practices. This could mean that committing to ESG, and communicating it successfully, will lead to greater returns. I feel comfortable making this assertation, not only due to anecdotal evidence, but also because there has this year been an excellent report issued by McKinsey, investigating the demand of consumers for ESG products.
They found that “Products making ESG-related claims averaged 28 percent cumulative growth over the past five-year period, versus 20 percent for products that made no such claims.” This was in the USA, and over the sales period from 2017 to 2022, so this accounts for the financial impact of the pandemic. I propose that there would not be a marked difference between consumer habits in the USA, and the UK and Ireland, and slightly older studies bear this out.
Of course, there is nuance at the individual product level, however broadly speaking, and across many categories, there was a material link between a business’s commitment to ESG, and consumer spending on their products. This hasn’t even considered the impact on tendering if you don’t give at least a nod to ESG. Procurement Policy Note (PPN) 06/20, requires that ESG is expressly evaluated in all UK central government procurement as of January 2021. This Note, entitled ‘Taking account of social value in the award of central government contracts’ requires measurement using a ‘social value model’, with a minimum weight of 10% is given to ESG objectives when it comes to each procurement.
The social value model is divided to cover 5 main themes:
COVID-19 recovery, tackling economic inequality, fighting climate change, equal opportunities and wellbeing. Businesses that are unable to demonstrate commitment to ESG will be at a severe disadvantage when applying for a tender, and those who are found to have exaggerated their commitment may be blocked from applying for another government tender for up to three years.
This builds on the previous PPN 09/16 which applied to all UK central government construction, infrastructure, and capital investment procurements valued over £10m, which in turn expanded on the Public Services Act 2012 that mandates all contractors consider ESG at the pre-tender stage. Any company looking to land a large contract in the UK should certainly be active rather than performative with their ESG commitments.
Measuring your Impact
There is no hard and fast set of standards to measure your impact, which is good news, as you can decide where you want to focus and consider what a good result would be for your business. If you are struggling in one area, then your target may be different from someone already doing well. Any improvement is good, and we can’t let the pursuit of perfection lead to inaction.
A business may want to measure metrics such as carbon emissions, amount of waste sent for recycling, water usage, employee turnover rates, diversity at the management level and above, wages, and more. How do you want to prioritise helping your community?
Making the Commitment
Ultimately it is up to individual businesses whether they want to engage with ESG. However, I think it’s clear that there is a good argument for doing so. With over 3 quarters of business leaders wanting the government to legislate in this area, and with the issue being popular among the voting public, it seems likely that legislation will be bought in through the door of the Better Business Act soon. When it does, businesses that have already embraced ESG practices will be ahead of their competition. If legislation isn’t bought in, it would most likely still be in the business’s best interests to adopt a more mindful approach to appeal to a more environmentally and social equality-driven consumer base.
The best studies tell us that demand for ‘green’ products is rising in developed nations and is expected to continue to do so. I would also argue that as business leaders, as people who can make a change, we are morally obligated to preserve what we can for the generations ahead.